Los Angeles received an improved outlook from Kroll Bond Rating Agency to stable based on the waning impact of the pandemic on city finances and substantial federal relief.
The $639.5 million of federal aid the city received in May from the America Rescue Plan Act helped it dig out of a pandemic-induced budget hole, according to the rating agency. Last year, the city was struggling to close an $800 million deficit.
The outlook revision to stable from negative affects the general obligation bonds and lease revenue bonds issued by the Municipal Improvement Corporation of Los Angeles.
Kroll analysts pointed to the city’s improved fiscal outlook since its last rating report for the outlook change and increased certainty regarding the city’s ability to achieve budgetary balance over the near to mid-term.
The federal aid enabled the city to balance the budget “without the need to draw down amounts in the contingency reserve account and the budget stabilization fund or engage in deficit borrowing, two components of the city’s prior budget-balancing plan that led to KBRA’s decision in February to assign a negative outlook to the GO and the MICLA credits,” analysts wrote in the June 14 ratings report.
Los Angeles Mayor Eric Garcetti signed an $11.2 billion spending plan on June 2 for the fiscal year that begins July 1 that allocated $791 million to solving the city’s homelessness crisis, $300 million for racial and economic justice programs and $64 million to help residents recover from the economic impacts of COVID-19.
At the budget signing earlier this month Garcetti said the budget “is about more than recovering from a once-in-a-generation crisis — it’s about bending the arc of our city’s history in the direction of greater equity and justice.”
City Council President Nury Martinez called the budget responsive to the systemic inequities and challenges that held back too many neighborhoods in the city for generations.
“We are not naïve, we are going to change historic inequities with one step or with one budget, but with this budget we take a step forward towards that,” Martinez said.
The city plans to price $1.9 billion in late June for the annual sale it uses to fully pre-pay its required pension contributions to LACERS and LAFFP and to provide general fund cash-flow management, Kroll said.
"Although the city's finances may be pressued by pandemic-induced revenue challenges and continued escalation in pension costs, KBRA views the city's willingess to address rather than defer rising fixed costs as a distinguishing characteristic that has served to sustain the city's strong financial flexiblity over time," Kroll analysts wrote.
The stable outlook reflects "reduced uncertainty regarding the recovery trajectory of the city's business and employment sectors, thanks to vaccinations, the lessening of public health restrictions and reopening of schools and businesses."
The city's 10.9% unemployment rate, currently higher than the state's 8.1% rate and the nation's 5.7% rate, is expected to decline as businesses reopen. The governor announced a full reopening of the state on Tuesday.
The city also expects to receive a second payment of ARPA relief funds in May 2022 for a total of $1.28 billion between the two payments.
The credit positives Kroll cited included an experienced leadership team, established financial management practices, a history of proactive fiscal controls and a manageable debt burden with minimal exposure to variable rate debt and no exposure to interest rate swaps.
The city's bonded indebtedness and long-term notes payable totalled $31.9 billion as of June 30, 2020, according to the city's comprehesive annual financial report.
